What are Smart Contracts
Everyone is talking about them, but nobody ever explains them.
Definition and Origins
A smart contract is a self-executing contract that holds the terms of agreement between two parties directly within the code. The terms of the agreement usually exist on a blockchain network, are traceable and irreversible. They allow for parties to exchange money, property, shares or other things of value
Smart contracts (also known as cryptocontracts, blockchain contracts and digital contracts) allow agreements to occur between anonymous parties without the need of a third party. They are currently most commonly developed using the coding language Solidity.
As Vitalik Buterin says, “the program runs this code and at some point it automatically validates a condition and it automatically determines whether the asset should go to one person or back to the other person, or whether it should be immediately refunded to the person who sent it or some combination thereof.”
The term “smart contract” was first used by Nick Szabo in 1997. Nick Szabo was one of the first core developers of Bitcoin, and the designer of Bit Gold in 1998, a strong design precursor to Bitcoin. He had a cryptography and law background and was part of the “cypherpunks”, a group of geniuses looking to solve the world’s trust problems through cryptography.
Szabo saw the power of combining an immutable ledger that cannot be changed with a digital self-executing contract and he wanted to use a distributed blockchain to keep contracts within code and proliferate the code throughout the network.
How to Make Sense of Smart Contracts
Regular contracts require someone to make a decision- a third party such as a lawyer or auditor has to adjudge agreements. A smart contract does not require any decision making by any third party. With a smart contract, when you put in an input, you get an automatic output, like a vending machine.
A good illustration to think about how this works is with crowdfunding platforms like GoFundMe. People can create a GoFundMe for a cause, and supporters can donate funds towards it.
Both the fund starters and the fund supporters trust GoFundMe to keep the funds safe and disperse them once the goal has been reached, or return the funds if the goal is not reached.
GoFundMe is a trusted third party. With Smart Contracts we can build the same system as GoFundMe, but it wouldn’t require a third-party. When supporters donate, it does not get dispersed to the fund starters until the right parameters are met, then the code allows the funds to be dispersed automatically.
Why Use Smart Contracts in Blockchain
Because a smart contract is held within a blockchain, everything is distributed and no one party controls the contract or the value being transferred through the .
There are other great benefits of the blockchain and smart contracts:
- It is immutable which means once the smart contract is created no one can go back and change the code
- It is safe since the distributed ledger allows the result of the smart contract to be validated by the network. This means a bad actor cannot force the contract to release funds as the network will mark the attempt as invalid
- It is trustworthy since any and all documents are encrypted on the ledger
- There is always a backup of the contract and your valuable items since the contract is distributed throughout the ledger
- You save time and money using smart contracts because they don’t require endless paperwork and third parties
- Accuracy is improved since computer code is less fallible than human decision makers
Where can I find Smart Contracts?
Smart Contracts can currently be utilized on:
Ethereum, FAB, Zilliqa, Qtum, NEO, EOS and even Bitcoin, but with less features.
What Can Smart Contracts Be Used For?
There are many other good use cases for smart contracts beyond crowdfunding including :
- Management
- Voting Systems
- Supply Chains
- Health Care Information
- Giving loans and taking automated payments
- Processing Insurance claims
- Payments on delivery of materials in supply chains
- Creating service orders when IoT data shows metrics outside of an acceptable range
- Mortgages
- Land Title Recording and changing
For more in depth explanations of how and why Smart Contracts and Blockchains are used for these purposes, read the Use Cases found here: https://medium.com/fast-access-blockchain/tagged/use-cases.
